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Can Self-Control Explain Avoiding Free Money? Evidence from Interest-Free Student Loans

Author

Listed:
  • Brian C. Cadena

    (Department of Economics, University of Colorado–Boulder)

  • Benjamin J. Keys

    (Harris School of Public Policy, University of Chicago)

Abstract

This paper uses insights from behavioral economics to explain a particularly surprising borrowing phenomenon: one in six undergraduate students offered interest-free loans turns them down. Models of impulse control predict that students may optimally reject subsidized loans to avoid excessive consumption during school. Using the National Postsecondary Student Aid Study, we investigate students' take-up decisions and identify a group of students for whom the loans create an especially tempting liquidity increase. Students who would receive the loan in cash are significantly more likely to turn it down, suggesting that consumers choose to limit their liquidity in economically meaningful situations. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Brian C. Cadena & Benjamin J. Keys, 2013. "Can Self-Control Explain Avoiding Free Money? Evidence from Interest-Free Student Loans," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1117-1129, October.
    • Handle: RePEc:tpr:restat:v:95:y:2013:i:4:p:1117-1129
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    Citations

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    Cited by:

    1. Dominique J. Baker & William R. Doyle, 2017. "Impact of Community College Student Debt Levels on Credit Accumulation," The ANNALS of the American Academy of Political and Social Science, , vol. 671(1), pages 132-153, May.
    2. Benjamin M. Marx & Lesley J. Turner, 2019. "Student Loan Nudges: Experimental Evidence on Borrowing and Educational Attainment," American Economic Journal: Economic Policy, American Economic Association, vol. 11(2), pages 108-141, May.
    3. Rajeev Darolia, 2016. "An Experiment on Information Use in College Student Loan Decisions," Working Papers 16-18, Federal Reserve Bank of Philadelphia.
    4. Camelia M. Kuhnen & Brian T. Melzer, 2018. "Noncognitive Abilities and Financial Delinquency: The Role of Self‐Efficacy in Avoiding Financial Distress," Journal of Finance, American Finance Association, vol. 73(6), pages 2837-2869, December.
    5. Benjamin M. Marx & Lesley J. Turner, 2015. "Borrowing Trouble? Student Loans, the Cost of Borrowing, and Implications for the Effectiveness of Need-Based Grant Aid," NBER Working Papers 20850, National Bureau of Economic Research, Inc.
    6. Catherine, Sylvain & Yannelis, Constantine, 2023. "The distributional effects of student loan forgiveness," Journal of Financial Economics, Elsevier, vol. 147(2), pages 297-316.
    7. Herber, Stefanie P. & Kalinowski, Michael, 2016. "Non-take-up of Student Financial Aid: A Microsimulation for Germany," VfS Annual Conference 2016 (Augsburg): Demographic Change 145727, Verein für Socialpolitik / German Economic Association.
    8. Looney, Adam & Yannelis, Constantine, 2022. "The consequences of student loan credit expansions: Evidence from three decades of default cycles," Journal of Financial Economics, Elsevier, vol. 143(2), pages 771-793.
    9. Adeline Delavande & Basit Zafar, 2014. "University choice: the role of expected earnings, non-pecuniary outcomes, and financial constraints," Staff Reports 683, Federal Reserve Bank of New York.
    10. Robin Henager & Sophia T. Anong & Joyce Serido & Soyeon Shim, 2021. "Does Financial Satisfaction Vary Depending on the Funding Strategy Used to Pay for College?," Journal of Family and Economic Issues, Springer, vol. 42(3), pages 429-448, September.
    11. Berrak Bahadir & Dora Gicheva, 2022. "Macroeconomic Implications of Student Debt: A State‐Level Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(8), pages 2273-2300, December.
    12. S. Nageeb Ali, 2011. "Learning Self-Control," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 857-893.
    13. Herber, Stefanie P. & Kalinowski, Michael, 2016. "Non-take-up of student financial aid: A microsimulation for Germany," BERG Working Paper Series 109, Bamberg University, Bamberg Economic Research Group.
    14. Abraham, Katharine G. & Filiz-Ozbay, Emel & Ozbay, Erkut Y. & Turner, Lesley J., 2020. "Framing effects, earnings expectations, and the design of student loan repayment schemes," Journal of Public Economics, Elsevier, vol. 183(C).
    15. Benjamin M. Marx & Lesley J. Turner, 2019. "Student Loan Choice Overload," NBER Working Papers 25905, National Bureau of Economic Research, Inc.
    16. Mueller, Holger M. & Yannelis, Constantine, 2019. "The rise in student loan defaults," Journal of Financial Economics, Elsevier, vol. 131(1), pages 1-19.
    17. Marx, Benjamin M. & Turner, Lesley J., 2020. "Paralysis by analysis? Effects of information on student loan take-up," Economics of Education Review, Elsevier, vol. 77(C).
    18. Michael Boutros & Nuno Clara & Francisco Gomes, 2023. "Borrow Now, Pay Even Later: A Quantitative Analysis of Student Debt Payment Plans," Staff Working Papers 23-54, Bank of Canada.
    19. Katharine G. Abraham & Emel Filiz-Ozbay & Erkut Y. Ozbay & Lesley J. Turner, 2022. "Effects of the Menu of Loan Contracts on Borrower Behavior," Management Science, INFORMS, vol. 68(1), pages 509-528, January.
    20. Michael S. Kofoed, 2017. "To Apply or Not to Apply: FAFSA Completion and Financial Aid Gaps," Research in Higher Education, Springer;Association for Institutional Research, vol. 58(1), pages 1-39, February.
    21. Stephanie Riegg Cellini & Rajeev Darolia, 2017. "High Costs, Low Resources, and Missing Information: Explaining Student Borrowing in the For-Profit Sector," The ANNALS of the American Academy of Political and Social Science, , vol. 671(1), pages 92-112, May.
    22. Stefanie P. Herber & Michael Kalinowski, 2016. "Non-Take-Up of Student Financial Aid: A Microsimulation for Germany," SOEPpapers on Multidisciplinary Panel Data Research 844, DIW Berlin, The German Socio-Economic Panel (SOEP).
    23. Serge Herzog, 2018. "Financial Aid and College Persistence: Do Student Loans Help or Hurt?," Research in Higher Education, Springer;Association for Institutional Research, vol. 59(3), pages 273-301, May.
    24. Christopher Avery & Sarah Turner, 2012. "Student Loans: Do College Students Borrow Too Much--Or Not Enough?," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 165-192, Winter.

    More about this item

    Keywords

    student loans; self-control; time discounting; debt aversion; mental accounting;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy

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